China continues to expand its influence in Africa as foreign direct investment reaches an all-time high. However, striking a balance with citizen empowerment policies is proving to be a challenge. Vanessa Ip reports.
There is no other country more entrenched in today’s Africa than China. According to a 2017 report by McKinsey & Company, Dance of the lions and dragons: How are Africa and China engaging and how will the partnership evolve?, more than 10,000 Chinese-owned firms are currently operating in Africa. Levels of trade, investment, infrastructure, financing and aid from China are unsurpassed. At the 2015 Forum on China-Africa Co-operation (FOCAC) summit, President Xi Jinping pledged to invest US$60 billion in Africa by the end of 2018. Although it is currently unclear how much of this has resulted in capital actually committed, there is no question that China has become Africa’s most important economic partner, with further momentum being gained from the Belt and Road initiative.
McKinsey reports that Chinese-African trade has grown by approximately 20% per year, from US$13bn in 2001 to US$188bn in 2015. Foreign direct investment (FDI) has grown by 40% per year from US$1bn in 2004 to over US$35bn in 2015. Since 2015, China has become the single largest bilateral infrastructure financier in Africa.
Another 2017 report by Big Four accounting firm Ernst and Young, titled Connectivity Redefined, notes most of China’s financial flows into Africa are in the form of development assistance (loans and aid). FDI patterns have held steady in spite of growing global uncertainty, with China becoming increasingly important as an FDI provider, as Africa’s biggest traditional investors, the US and UK, face domestic policy changes and uncertainty.
“Looking at Africa in general, we see industries responding to the continent’s emerging and growing consumer class,” says David Thompson, director and regional practice head of corporate and commercial at Cliffe Dekker Hofmeyr in Cape Town, South Africa. “Manufacturing, technology, media and telecoms, and consumer products and retail sectors are coming into their own, where previously the main focus was extractive industries and infrastructure.
“However, it would be a mistake to paint the entire continent with the one brush. With 54 countries and covering a huge geographical area, Africa’s market is nuanced and dynamic, with key pockets of investment potential.”
Part One of this special report will focus on key developments in Central, Western and Southern Africa, covering Angola, Botswana, Cameroon, Cape Verde, Ghana, Mali, Nigeria, and South Africa.
Botswana. According to Tatenda Dumba, senior associate at Minchin & Kelly in Gaborone, Chinese entities are dominant in the construction and retail clothing sectors in Botswana. The Chinese have been behind the construction of several high-end buildings in the commercial and residential sectors, and have plans to dominate the local manufacturing industry. She says that while Botswana relies heavily on mining, the government is encouraging investors to establish alternative businesses. In particular, it is welcoming manufacturing companies and science and technology companies.
Dumba says the regulatory environment in Botswana is “generally easy for foreign investors”, and the Botswana Investment Trade Centre, a government agency, encourages FDI by offering attractive tax haven structures and financial grants. “The only regulatory challenges they face is that certain industries are restricted to citizen-owned enterprises, especially those in normal trading businesses such as retail clothing or supply of wholesale durable goods,” she says. “Therefore, to obtain trade licences to conduct such businesses is often a challenge. The government of Botswana is also moving increasingly towards citizen economic empowerment, therefore it is more welcoming of foreign investors that partner with locals.”
Dumba urges Chinese investors to become familiar with the Special Economic Zones Act, which came into force on 2 May 2016, and which has the objective of establishing, developing and managing special economic zones in order to create a conducive environment for local and foreign investment, and help the expansion of employment opportunities and attainment of economic growth targets in Botswana.
South Africa. The country is one of the largest hubs for Chinese FDI and is also the continent’s largest intra-regional investor. According to fDi Markets, South Africa is among the top five African destinations for Chinese direct investment, receiving more than US$5 billion between 2003-2017.
Chinese investment in South Africa remains focused on mining, resources and infrastructure. However, according to Thompson, the country also acts as an anchor economy, from which to launch ambitions into the rest of the continent. “In the past few years, we have seen and welcomed Chinese investment in South Africa’s manufacturing, banking, technology, media and telecoms [TMT], consumer products and retail, services, infrastructure, real estate, hospitality, and construction sectors,” he says. “This diversification runs alongside more traditional and still-substantial investment in South Africa’s extraction industries.”
Thompson’s firm, Cliffe Dekker Hofmeyr, recently acted for SOIHL, a subsidiary of Sinopec Group, in the single-largest acquisition (if implemented) by a Chinese firm of a controlling stake in a major South African company. Sinopec acquired a 75% stake in Chevron’s South Africa and Botswana assets for US$900 million. According to Thompson, in line with South African regulation, the remaining 25% of Chevron’s South Africa and Botswana assets are held by a consortium of Black Economic Empowerment (BEE) shareholders and an employee trust.
“In January 2018, South Africa’s Competition Commission recommended the conditional approval of the Sinopec and Chevron merger,” he says. “The conditions give insight into the unique public interest challenges associated with significant South African deals, and how these factors need to be weighed against commercial considerations.
“Sinopec agreed to establish roots in South Africa, using the country as a regional base for its midstream and downstream operations in Africa, and as a platform from which to pursue its future expansion into Africa. In addition, Sinopec promised to make investments over five years to upgrade the Cape Town refinery into a world-class plant; to maintain the current level of employment post-acquisition, and not make any retrenchments for a few years post-acquisition, and to favour small and black-owned businesses as fuel retailers when developing their fuel marketing business.”
Pieter Steyn, director of Werksmans in Johannesburg, says the newly formed BEE Commission is becoming a “force to be reckoned with”. “The regulatory environment is continuously changing and developing, and Chinese investors must remain up to date,” he says.